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Partnership Formation and Taxation
Going into business with others requires planning from a legal and tax perspective. The number one most important step for a partnership, regardless of its entity type (LLC, LLP, or GP), is to create and adhere to an operating agreement.
The operating agreement will be the governing document of the partnership. There is an abundance of information available on how to properly structure operating agreements. Below is a very high-level summary of what is needed:
Tax and Financial Provisions:
Taxation of Partnership and Their Partners
A partnership is its only legal entity; however, it pays no tax. It does, however, file its own tax return (i.e., Form 1065 or the US Return of Partnership Income form). The filing deadline for partnership returns is March 15th. Form 1065 includes a profit and loss statement, balance sheet, and information on all its partners.
Each partner will be given a Schedule K-1 (i.e., Partner’s Share of Income, Deductions, Credits, etc.), which represents their share of the profit and loss from the partnership. This schedule is used by tax preparers when preparing your annual income tax return. Your share of the profit and loss will either increase or decrease your taxable income, thus the amount of tax you pay personally.
The Schedule K-1 information is a report on various forms and schedules of Form 1040. The most prevalent of these forms is Schedule E (i.e., Supplemental Income and Loss). Please contact us for assistance in filing your partnership operating agreements and/or tax returns.